Sunday, January 22, 2012

On China Trade, the Obama Administration Just Can't Stop Digging

When I first reported on the "bombshell" ruling of the US Court of Appeals for the Federal Circuit (CAFC) in GPX Int'l Tire Corp. v. United States that the US countervailing duty law did not apply to China and other "non-market economies," I noted that the court decision would likely cause a lot of legal and political scrambling by the Obama administration as it rushed to clean up the big mess that its CVD/NME policies (admittedly begun by the Bush administration) had caused. I also noted at the time that the administration could easily extricate itself from the deep CVD/NME hole that had been dug - in the US courts and at the WTO - if it did the smart, strategic thing and designated China a "market economy" under the US anti-dumping law.

It appears, however, that the administration has unsurprisingly decided not to take my advice, and instead is content to keep on digging, regardless of how deep and dirty their hole could get.

Late last week, USTR Ron Kirk and Commerce Secretary John Bryson sent an "urgent" letter to the heads of the House Ways & Means Committee and the Senate Finance Committee asking them to act quickly to pass legislation modifying the US CVD law to "clarify" that it applies to NMEs like China and Vietnam. The full text of the letter isn't available at the USTR or Commerce website (most transparent administration ever!), but here are the highlights (and here's a nice summary of the letter by the FT's Alan Beattie):

Absent legislative or judicial action, the court's ruling will take effect shortly after February 2, 2012. Should this occur, it would have substantial adverse economic implications for our country.

Accordingly, the Administration stands ready to work with Congress to enact legislation clarifying that the CVD law can be applied to subsidized goods from non-market economies, that CVD proceedings Commerce has already initiated on products from non-market economies are to continue, and that CVD determinations Commerce has made with respect to such products are to remain in effect.

This matter is of the utmost urgency. Absent legislation, should the decision of the court become final, Commerce will be required to revoke all CVD orders and terminate all CVD proceedings involving non-market economy countries, including 24 existing CVD orders on imports from China and Vietnam, as well as five pending investigations and two recently filed petitions....

The CVD proceedings placed at risk by the court's decision cover a wide range of products in which U.S. manufacturing is most competitive, including steel, aluminum, paper, chemicals, tires, and other products. The annual value of the subsidized imports covered by these CVD proceedings is $4.7 billion. The U.S. petitioning industries that are competing against these subsidized imports include small and medium-sized enterprises and large corporations; family-owned businesses and Fortune 500 companies. These petitioning industries - representing more than 80 companies - are spread across 38 states and employ directly tens of thousands of manufacturing workers.

The Administration is fully committed to enforcing our trade laws and to addressing unfair trade practices in accordance with our statutes, regulations, and international obligations. As our staff discussed with your staff soon after the court's ruling, we are currently reviewing all options, including a request for a rehearing by the full appellate court, as we believe the court's decision misreads the CVD statute, precedent, and Congressional intent and historic bipartisan support of strong CVD laws. Notwithstanding the strength of our legal position, prompt legislative action is necessary to clarify the law and avoid harm from injurious, subsidized goods.

There's way too much going on here for one blog post, so for now I'll only briefly mention the letter's rather ridiculous policy aspects. Most notably, Kirk and Bryson accept as gospel the notion that removing duties on Chinese imports would be a net loss for the US economy, and, in a similar vein, completely ignore the harms that such (illegal) duties have on American companies and consumers - a problem that's long been chronicled by Cato's Dan Ikenson. Also, as Ikenson notes in a new blog post, the current NME methodology used by DOC in anti-dumping cases is neither precise nor reasonable, so the idea that it is this precious thing that must be protected by urgent congressional action is downright laughable. Finally, the joint letter's one-sided nature provides an extremely troubling preview of President Obama's proposed trade agency consolidation. While I've expressed serious doubts that Obama's "plan" will ever go anywhere, the Bryson/Kirk letter should be extremely distressing for anyone who was hoping that the new trade super-agency would retain USTR's broader, more-balanced trade policy perspective (as opposed to DOC's more blatant and forceful mercantilism).

With the (bad) policy out of the way, I'd like to focus tonight on the letter's procedural, legal and political aspects. The letter makes clear that the Obama administration plans to pursue a two-track approach with respect to the GPX decision: (1) appeal it to the CAFC for a re-hearing or en banc review (i.e., a review by all of the circuit's judges instead of the typical three-judge panel); and (2) simultaneously seek congressional legislation that would ideally do three things: (a) "clarify" that the CVD law may be applied to imports from NME countries; (b) let the seven pending CVD investigations of NME imports continue; (c) and mandate that 24 previous CVD-NME determinations remain in force.

On the appeal front, the letter's "urgent" February 2 deadline is based on the 45-day deadline for seeking a re-hearing or en banc review before the CAFC, but the breathless air of urgency here is somewhat overblown. In fact, Congress probably has several months to draft and pass this legislation because the GPX ruling won't actually be "final" until all appellate avenues - at the CAFC and the Supreme Court - are foreclosed. The CAFC typically takes around 20 working days to act on a panel rehearing request and as much as 60 working days to act on a en banc rehearing request. Granting such a request is extremely rare, and it's highly unlikely that the court in this case will grant either request because the original decision was unanimous and the full court already had a chance to review it prior to publication. But even if both requests are denied, these long-ish deadlines mean that the Obama administration might be able to stretch out the appeals process at the CAFC until early May.

At that point, Congress might have to act, but only if the administration also hasn't decided to appeal the GPX decision to the Supreme Court. The joint letter doesn't mention that possibility, but my guess is that DOC and USTR are just focusing on the CAFC for now because the 90-day deadline for petitioning the Supreme Court for a writ of certiorari (by which the Court would accept the appeal) won't actually start running until the CAFC has rejected the administration's rehearing/en banc request(s) in early May. The Court typically decides whether to hear an appeal in 6-8 weeks, but this can be delayed where petitions are filed near or during the Court's summer recess in late June/early July. In that case, the Court wouldn't announce that it was denying certiorari - the most likely outcome in this case, as I've already explained - until the first Monday of October. So if DOC petitions the CAFC for an en banc re-hearing, then appeals the case to the Supreme Court after the CAFC rejects the re-hearing request, all possible appeals might not be foreclosed - and Congress might not be forced to act - until October 1, 2012!

Meanwhile, DOC will continue to act as if nothing has happened. The existing, now-illegal CVD orders will remain in place and duties will continue to be collected; the pending investigations will continue apace; and DOC will initiate new investigations upon receipt of a proper petition (as it just did in the new CVD investigations of wind turbines from China and steel hangers from Vietnam). ("Move along, nothing to see here. Please don't look at that joint letter to Congress behind the curtain.") For this reason alone, I expect every appeal possibility to be fully explored and utilized unless Congress acts in the meantime.

Congressional action, however, is probably going to be tricky. First, any legislation that applies retroactively to those 24 existing CVD orders - which the joint USTR/DOC letter expressly requests - could raise legal issues under US law and WTO rules. Although the law is unsettled in both jurisdictions, I'd be amazed if several US and/or Chinese companies didn't try to challenge the new law's retroactive application (and the collection of millions of dollars-worth of illegally-collected duties) in US courts, and/or the Chinese government didn't at least request consultations pursuant to WTO dispute settlement.

Second, and far more troubling, the likelihood that any legislation on China and CVDs can make it through both chambers of Congress during a contentious election seasons without attracting all sorts of nasty protectionist amendments - including one applying CVDs to imports of countries with "misaligned" or undervalued currencies - seems slim. While the GOP-controlled House might be trusted to produce and pass (trade remedies bills have broad bi-partisan support) a clean measure, the same very likely cannot be said of the Democrat-controlled Senate - the same Senate that passed a stand-alone currency bill by a strong margin only a few months ago and whose leaders, Harry Reid and Chuck Schumer, just love to force Republican Senators to vote on protectionist legislation during election years. And when a clean House bill and a currency-laden Senate bill get to a conference committee, do we really trust the conferees - including Ways & Means Chairman Dave Camp who is from trade-skeptical Michigan and up for re-election in November, and voted for a similar currency bill in September 2010 - to exorcise any offending currency language from a final bill?

I sure don't.

Moreover, if a CVD/NME/currency bill did emerge from the conference, strong bi-partisan support is all but certain in an election year, especially given the strong, vocal support for such a measure from GOP frontrunner candidate Mitt Romney. And let's face it: the chances that President Obama would veto that bill in the fall of 2012 - contrary to much of his own party, US labor unions and his own rhetoric - seem remote (particularly, again, given Romney's aggressive position on China trade).

As I've repeatedly mentioned here, any new currency law would be a real problem for the United States, as it would likely violate WTO rules, provoke retaliation and open the floodgates to US duties on imports from other countries (like Korea) who engage in currency policies similar to those of China. Maybe the possibility of the CVD/NME bill becoming a protectionist Christmas Tree is why Kirk and Bryson's letter has that exaggerated sense of urgency - maybe they know that the closer we get to November 2012, the more difficult it will be to prevent currency language from being included in any bill and thus to avoid a major trade conflagration between the United States and China (and several other distressed US trading partners). Of course, both the administration and Congress are very well aware of the fact that February 2 isn't the real deadline for action, so delay of any CVD/NME bill seems pretty inevitable, particularly given the current political climate.

Meanwhile, DOC will keep acting as if nothing ever happened, US importers and consumers will continue to pay illegal duties, and China will - for very good reason - keep complaining about US "protectionism" at every possible opportunity.

In short, the CVD/NME issue is shaping up to be a complete debacle - one that the Obama administration seems perfectly willing to continue, yet probably could be avoided if the United States just moved to designate China a "market economy" under the US anti-dumping law and/or ditched the problematic NME methodology altogether. Depending on the scope of any such effort, it could cause many, if not all, of the United States' CVD/NME problems to disappear. Pending CVD investigations of Chinese (and maybe Vietnamese if the whole methodology was scrapped) imports could continue, and new CVD investigations could be initiated, without any concern as to whether those proceedings violated US law or WTO rules.

DOC also could recalculate previous anti-dumping and countervailing duty decisions pursuant to standard "market economy" methodologies - a move that not only would eliminate the United States' need to meet the February late April 2012 deadline [note: it was just recently extended] for complying with the WTO Appellate Body's 2011 ruling against DOC's CVD/NME methodology, but also might (maybe) avoid further litigation related to the retroactive application of the CVD/NME law to those 20-plus CVD orders already in place. Even if that move weren't perfectly legal, the Chinese and Vietnamese governments value the elimination of the NME stigma so much that they might be willing to look the other way. (And, as I've previously mentioned, they also might be willing to make other concessions on issues like market access and IPR in exchange for the "market economy" designation.)

Such moves would greatly diminish the necessity and urgency of potentially-problematic, pre-November legislation "clarifying" US CVD law to apply to NMEs.

The big policy change also would give the United States some moral high ground in bilateral trade negotiations with China. The US has many legitimate complaints against unfair or distortive Chinese trade practices, but the CVD/NME issue - and the United States continued refusal to comply with adverse court and WTO rulings - undermine the strength of those very valid concerns and expose US exports to potential retaliation. And the United States will be required to relinquish China's NME status in December 2016, as stated in China's WTO Accession Protocol, so time is running out anyway. (Ikenson has more on these points here.)

In short, there's a very simple way to avoid most, if not all, of the economic, legal and political problems raised by the current CVD/NME mess, and the move makes lots and lots of sense regardless of the CAFC decision.